Friday, September 28, 2012

NewsDaily: Hollande stakes credibility on 2013 French budget

France unveils tough budget, Spain's Rajoy wins time

By Daniel Flynn
and Julien Toyer
Posted 2012/09/28 at 1:37 pm EDT

PARIS/MADRID, Sep. 28, 2012 (Reuters) ? France unveiled an austerity budget that would tax business and the super rich, but a report showing Spain's banks needed a manageable 59 billion euros in new funds bought time for Prime Minister Mariano Rajoy as he seeks to avoid a bailout.

French Prime Minister Jean-Marc Ayrault walks to deliver a speech after the weekly cabinet meeting at the Elysee Palace in Paris, September 28, 2012. Ayrault announced a budget bill for 2013 that commits France to 30 billion euros ($39 billion) of tax hikes and spending cuts with the goal of reducing the public deficit to 3 percent of GDP next year to honour the country's European commitments. REUTERS/Philippe Wojazer

Socialist President Francois Hollande's 2013 budget amounts to France's toughest belt-tightening for 30 years as the debt crisis takes its toll on the euro zone.

The package aims to narrow France's deficit to 3.0 percent of national output next year from 4.5 percent this year, bringing in 30 billion euros ($39 billion) for the treasury.

But the budget dismayed business by opting for tax hikes -- including a 75 percent tax on those earning over one million euros a year -- by holding public spending and not cutting government jobs.

With Hollande facing record unemployment and economic stagnation, there were also fears the deficit target will slip as France falls short of the modest 0.8 percent economic growth rate on which it is banking for next year.

"This is a fighting budget to get the country back on the rails," Prime Minister Jean-Marc Ayrault said, adding that the 0.8 percent growth target was "realistic and ambitious".

In Spain, an independent audit of the country's banks confirmed that a manageable 59.3 billion euros in extra capital is needed for them to ride out a serious economic downturn, buying time for Rajoy who faces intense pressure to seek an international bailout.

The audit is a condition of getting European funds to patch up Spanish banks that have been damaged by a prolonged real estate crash.

Spending cuts and tax hikes in response to the euro zone debt crisis are throttling any recovery in the euro zone's fourth largest economy, driving up unemployment and prompting sometimes violent street protests.


Spain has replaced Greece, Ireland and Portugal as the main threat to the survival of the euro currency project.

Both the strict 2013 budget presented by Rajoy's government on Thursday and the audit of 90 percent of Spain's banking system are necessary steps for Madrid to request sovereign aid and trigger a European Central Bank bond-buying program.

The audit results, which will be used to determine how much aid Madrid will tap from an agreed 100-billion-euro European credit line for the banks, were in line with government and market expectations and were applauded by the European Commission.

"That's another layer of uncertainty that's off the table," said David Schnautz, rate strategist at Commerzbank.

In further signs that austerity measures imposed on the euro zone's struggling southern members are having a harsh social cost, thousands of trade unionists marched through Rome as part of a general strike, forcing authorities to close the Coliseum.

Opposition to austerity policies aimed at steering Italy out of its economic crisis is growing as the country's year-long recession shows no signs of ending and unemployment continues to rise.

"At the moment, I just can't see a future that gives us any hope, particularly for the youth," Emilio Amiraglia, a former Italian soldier, said.

The march by mainly public sector workers followed clashes between anti-austerity protesters and police in Madrid and Athens this week.

In the euro zone's paymaster Germany, Angela Merkel learned on Friday that she will face former finance minister Peer Steinbrueck as the opposition Social Democrats' leader in next year's election, a development that may cause some unease in the chancellor's camp.

Steinbrueck, a combative veteran from the right of the centre-left SPD, backs tougher rules for banks and a coalition government with the Greens.

Analysts saw his rapid emergence from a three-way struggle within his party as the outcome most threatening to Merkel, though polls show the conservative leader still well ahead.

"We want to oust this government. We want to make sure it isn't just partially replaced but completely replaced with an SPD-Greens government," he told a news conference, referring to the ecologist party currently ranked third in opinion polls.

(Writing by Giles Elgood, editing by Peter Millership)

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